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EXECUTIVE
The W hite H ouse
WASHINGTON

J ■

Joe Califano Look at this.
I agree with Okun. Have Okun
talk to Fowler and see if he and
Martin agree.
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7/16/68
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THE CHAIRMAN OF THE
COUNCI L OF ECONOMIC ADVISERS
W A S H IN G T O N

July 1 , 1968
5

MEMORANDUM FOR THE PRESIDENT
Subject:
1.

Financial Conditions and Policy

Interest rates have shown a disappointingly small movement since
the tax bill was passed.
Financial markets were moving ahead nicely while the bill was
progressing toward final enactment. But since then, they have
stalled
Rates actually rose a bit in the last week of June. But they
have come down again most recently. Investors are becoming
aware of how much the fiscal package will cut Treasury financing
needs. But they are waiting for a signal from the Fed.
As shown in the table, most rates are still well above the year's
lows of January-February, although well below the high point
of late May.
Jan-Feb
1968 Low

May 21-24
High

June 21
(post tax b ill)

July 12

4.82
5. 43
5. 08

5.90
6. 17
5. 54

5. 20
5. 56
5. 12

5. 38
5. 53
5. 10

6. 18
6. 50

6.83
7.09

6. 67
7. 00

6. 56
7. 04

4. 16

4. 71

4. 43

4. 36

Treasury issues
3 month bills
3-5 year issues
Long-term bonds
New corporate bonds
Aaa-rated
Aa-rated
Long-term municipal bonds




-23.

The thrift institutions suffered heavy deposit outflows in late June
and early July, as depositors took advantage of high yields on
securities and the booming stock market.
Savings and loan associations and large mutual savings banks
in New York City had net losses during this period totaling
$1,5 billion
--

double the outflow of a year ago,

--

about three^-fourths as large as during the liquidity M
crisis’1
of m id -1966.

There are some points on the brighter side
--

the thrift institutions started with good liquidity positions and
are not badly squeezed by the outflow;

--

many who had f eared even greater losses are now expressing
considerable relief and confidence that the worst is over;

--

we are thus assured that homebuilding will not be collapsing
as it was in 1966.

But we want and need good gains in homebuilding for the end of
1968 and the first half of 1969. And we won’t get them unless
interest rates on securities start coming down soon.
W arren Smith has called a meeting of the housing credit committee
for Wednesday. The group consists of representatives from
Treasury, Budget, HUD, Fed, FNMA, VA, and FH LBB. They
w ill see whether any administrative actions can be taken to support
housing.
4.

Against this background of recent developments, the Federal Reserve
Open Market Committee will be meeting tomorrow. It will be their
first meeting since the tax bill was passed.




Most members of the Committee share our disappointment
that interest rates have stopped falling.




- 3 -

Most also recognize that, if they wait for really hard evidence
that the economy has cooled off, their easing may be too late.
But many fear that any overt monetary easing might offset the
big boost to world confidence in the dollar brought by the tax
bill. They also fear that a drastic easing would be viewed as
undoing the anti-inflationary effect of fiscal restraint.
The Fed is thus split. We have made our views clear in frank
discussions with the Board.
We do not expect the Fed to make a big move toward ease right
now - - such as a cut in the discount rate. But we hope they will
adopt some relaxation in open market operations - - enough to
bring a visible decline in M
net borrowed reserves1 of the commercial
1
banks and in the interest rate at which "Federal funds" are traded
among the banks.

Arthur M. Okun


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102